In my last piece, I wrote that stock market valuations are currently at the same level they were when Warren Buffett, in November 1999, wrote his famous op-ed for Fortune magazine explaining that investors would inevitably be disappointed by returns over the coming decade. The stock market actually declined 30% over the following 10 years. “Disappointed” was actually an understatement as investors were downright despondent (which set up a wonderful opportunity to be greedy).

In fact, when looking at median valuations in today’s market, stocks are even more overvalued than they were at the peak of the internet bubble, some 3 or 4 months after Buffett’s piece was published. Considering valuations are roughly equivalent, or even worse than back then, what are the odds that we see another “lost decade”?

This is actually fairly easy to answer. The valuation indicator we looked at in the last post, total stock market capitalization in relation to Gross National Product, has actually been 83% negatively correlated to future 10-year returns dating back to 1950 (high valuations mean low forward returns and vice versa). Based on this correlation, this measurement of valuations, Buffett’s favorite, currently forecasts an annual return over the coming decade of about -0.88%. Yes, that’s losing almost 1% per year over the next decade – the very definition of a lost decade, even if it’s not quite as bad as the 1999-2009 period.